Fiscal Cliff volatility to rattle commodity markets

With barely a month left before the “fiscal cliff,” Republicans and Democrats remained far apart on Friday in talks to avoid the across-the-board tax hikes and spending cuts that threaten to throw the country back into recession. While President Barack Obama visited a Pennsylvania toy factory to muster public support for tax hikes on the rich, portraying Republicans as scrooges at Christmas time, his primary adversary in negotiations, Republican House Speaker John Boehner, continued to describe the situation as a stalemate.

The argument will resume again and pick up further steam next week with a possible confrontation in the House of Representatives between Democrats and Republicans over the timing of a vote on tax hikes. Lawmakers are nervously eyeing the markets as the deadline approaches, with gyrations likely to intensify pressure to bring the drama to a close. Obama, speaking in Pennsylvania, said he was encouraged by the shifting views of some Republicans, and urged House approval of a bill that has already cleared the Democratic-controlled Senate that would lock in the middle-class tax cuts and raise the rates for the rich. Officials on both sides of the debate say the political jockeying is likely to continue this week. Details of a compromise should emerge next week if an agreement is to be reached in time.

We believe a short-term deal will likely be made to not increase middle class taxes. But chances of a long-term deal are low. If politicians can’t agree with this then we doubt there will be an agreement any closer to the 2014 midterms. Even if the cliff is averted and middle class taxes don’t rise, the fiscal dysfunction is likely to continue. Overwhelming debt levels could propel the U.S. economy back into a recession while additional taxes at this juncture could dent the reviving growth sentiment.

The effect of the dialogues, deliberations and statements coming from the politicians on “Fiscal cliff” could have a profound effect on commodities and tremendous volatility can be seen in the coming weeks. Investors will have to brace themselves for some volatile as well as sharp pullbacks either ways in commodities before the financial year ends.

GOLD

Bullion which has seen an appreciation of more than 15% approximately so far could come under pressure compared to other assets. Profit-taking could initially drag bullion prices lower. However, any quick resolution before December, could result in a rally along with other others assets before the year-end. This could be the perfect and much-needed catalyst for funds to propel prices to yearly highs. A freak 2 ton order to sell post the thanksgiving holiday saw panic selling. An order of this size during the end of the year clearly hints at the urgency by funds to cash in on profits. Such bouts of profit-taking will continue till December-end and even into the new year.

However, this cannot take away gold’s potential to appreciate going forward. The Federal Reserve’s stance for keeping rates unusually low till 2015 and their continuance of the quantitative easing program will see the dollar depreciating going forward and increasing bullion’s appeal. Even in the scenario that the “Fiscal Cliff” talks get dragged on beyond the December 31, 2012 deadline, and there could be a sharp sell-off in line with other assets, however, bargain hunting will return as gold’s safe-haven appeal in a recessionary environment could come into play once again.

Technically, Comex gold could struggle in the $1700-35 range and then weaken further lower towards $1645. Direct rise above $1745 could turn the picture bullish again targeting $1800 levels.

In MCX , weakness is evident with 32,200-300 being a strong resistance zone now for February futures and a decline towards 31,000 levels look likely in the coming weeks.

CRUDEOIL

Energy futures were higher Monday, buoyed by a rise in Chinese manufacturing, while the oil-price forecast for next year looks bright. While tensions in the Middle East continue to underpin crude prices, the focus has lately shifted more toward the demand outlook in the world’s two biggest economies–the U.S. and China. Crude-oil prices rose Monday in tandem with Asian shares, as optimism for a pickup in the Chinese economy was fuelled by manufacturing data released over the weekend showing that China’s official Purchasing Managers Index rose to a seven-month high in November. The main driver however, remains hope for a timely solution to the U.S. fiscal cliff and a possible uptick in demand, despite recent mixed signals from the Obama administration and Congress. Increased demand from recovering emerging markets and a possible minor decline in supply could underpin prices.

Technically, prices are headed back towards $95/bbl with strong supports in the $87-88 area.

In MCX, prices are expected to head towards 5065/bbl followed by 5190.

Gnanasekar Thiagarajan, Director – Commtrendz Research.

He can be reached at gnanasekar.t@gmail.com

Viewer Disclaimer: The content in this blog compiled from various sources, is not a recommendation to buy/sell commodities and currencies. The author is not liable for any loss or damage, including without limitations, any profit or loss which may arise directly or indirectly from the use of above information.

DISCLAIMER : Views expressed above are the author's own.

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Director at Commtrendz Research and a consultant to MCX & MCX-SX and many more corporations both in Indian and overseas. More than 20 years of experience in commodity and forex trading. Formerly a forex dealer with Bank of Nova Scotia.

Director at Commtrendz Research and a consultant to MCX & MCX-SX and many more corporations both in Indian and overseas. More than 20 years of experience in. . .